Question

China is the largest creditor to the U.S. (the country that has the largest share of U.S. Treasuries). Using the Loanable Funds Theory, explain how interest rates in the U.S. change if China continues selling U.S. Treasuries. Support your answer with a properly labeled graph. Explain what happens to the world interest rates.

Answer 1

China is one of the largest holders of US treasuries. It holds US treasury bonds worth more than a trillion dollars. However, it is around 5% of the total US treasury bonds but dumping off those bonds by China could induce high volatility in the market.
US treasuries are liabilities and if China sells it then the US will have to pay them. If the volume is quite large then it will decrease liquid funds in the market and that will result in an increase in the interest rates. This will also cause the bond prices to fell and bond yield to rise.

The US is the largest economy in the world and any change in its interest rate affects the domestic as well as the global economy. The other countries may raise their interest rates following the US to remain attractive in the bond market or to stop the capital flight.
However, the interest rate is the function of the macroeconomic situation and countries choose the appropriate rate according to the economic condition.